Recalibrating functional claiming: A way forward
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
Essential Pensions News covers the latest pensions developments each month in an “at a glance” format.
Of interest to all pension savers are the changes announced in the Summer Budget 2015, which we set out in our update for July 2015. Special note should be taken by DB schemes of the potential effect of the tapered annual allowance. Any provisions in scheme rules which restrict DB or cash balance benefits in terms of “annual allowance” should be reviewed without delay. In addition, higher rate taxpayers may wish to use the remainder of this tax year to make further pension savings to beat the taper.
The proposed changes, which are included in the draft Finance (No. 2) Bill 2015 include:
Lifetime allowance - the lifetime allowance (LTA) for pension contributions will be reduced from £1.25 million to £1 million from 6 April 2016. Transitional protection for pension rights already over £1 million will be introduced alongside this reduction to ensure the change is not retrospective. The LTA will be indexed in line with the CPI from 6 April 2018.
Annual allowance - there will be a reduced annual allowance (AA) for high earners. Those with annual incomes over £150,000 will see their AA tapered away to a minimum of £10,000. This policy comes into effect from 6 April 2016. Legislation will be introduced to align pension input periods (PIPs) with the tax year with immediate effect from 8 July 2015. A PIP that was open on 8 July 2015 closed on that date and the next PIP runs from 9 July 2015 to 6 April 2016, creating two mini pre-alignment and post-alignment tax years. Transitional measures are being introduced to protect savers who might otherwise be affected by the changes in the 2015/16 tax year, by giving individuals an £80,000 AA for 2015/16, although savings made between 9 July 2015 and 6 April 2016 are limited to £40,000.
For the £150,000 limit to bite, income taken into account is adjusted income which includes taxable earnings, and the value of all pension contributions, but not charitable contributions. This means high earners cannot avoid the reduced AA via salary sacrifice. The AA taper will apply only to individuals whose income (excluding pension contributions) exceeds £110,000 (the threshold income), to ensure that the taper does not affect lower paid individuals with high pension contributions. However, there is an anti-avoidance provision applying to employment income given up by way of salary sacrifice on or after 9 July 2015.
Useful annual allowance calculators are available on HMRC’s website.
Higher rate tax payers may wish to check whether they could be affected by the tapered AA from April 2016. The threshold and adjusted income limits are calculated including all taxable income, not merely salary. HMRC’s AA calculators can then be used to confirm how much carry forward allowance an individual may have, and the opportunity may be taken during the remainder of the tax year 2015/16 to make additional pension contributions where possible.
Of general interest are the contents of the two most recent editions of HMRC’s newsletter, summarised at the link below.
Published on 21 July 2015, Newsletter 70 includes the following:
View Newsletter no. 70.
Published on 13 August 2015, Newsletter 71 includes the following:
View Newsletter no. 71.
Of interest to all DB scheme trustees in relation to funding negotiations is the upcoming deadline for the preservation of any power under the scheme rules to make a repayment of surplus to an employer.
The trustees’ power arises under section 251 of the Pensions Act 2004 (Section 251), and enables them to pass a resolution by 6 April 2016 preserving any such repayment provision under the scheme rules where certain conditions apply.
Section 251 allows trustees to pass a resolution to confirm or amend powers in their scheme's rules to make payments to the employer, or allow them to cease to be exercisable. Trustees need to pass the relevant resolution before the deadline of 6 April 2016, or it will be lost.
There are certain restrictions on the power to pass a resolution, including:
Given the final deadline of 6 April 2016, to allow for the required notice period, action should be taken without delay where trustees wish to preserve the repayment power.
The trustees must be satisfied that “it is in the interests of the members of the scheme that the power is exercised in [this] manner” and they may add conditions, and specific circumstances, on the use of the power to pay surplus to employers, which must be satisfied before that power is exercised. In situations where the trustees previously passed a resolution before 6 April 2011, they may amend or revoke that resolution.
Trustees will need to decide whether they wish to pass a resolution to allow repayment of surplus to employers and consider whether to introduce restrictions as to the circumstances in which such a power might be used (this is permitted even where such restrictions did not exist previously).
This issue may well be relevant for scheme funding negotiations, since an employer may be less willing to provide what it may consider to be generous scheme funding if there is no prospect of being able to access any “trapped” surplus in future.
We are advising trustees who have started the process for passing a Section 251 resolution to complete this action as soon as possible, so that there is no possibility of the issue being overlooked later.
Please contact your usual scheme adviser at Norton Rose Fulbright for further detail.
Of interest to all occupational schemes in which members have only DC benefits is the abolition of short service refunds for members with less than two years’ pensionable service with effect from 1 October 2015.
Amendments to legislation set out in the Pensions Act 2014 (the Act) effectively abolish short service refunds from occupational DC schemes for members with less than two years' pensionable service.
Section 36 of the Act amends section 71 of the Pension Schemes Act 1993 so that where all the benefits to be provided are money purchase, entitlement to short-service benefits begins when a member has 30 days' qualifying service. The amended provisions will mean that there is an effective 30-day vesting period for short-service benefit in relation to all money purchase schemes.
The new maximum 30 day refund period has been introduced to reflect the opt-out period for auto-enrolment. Under auto-enrolment provisions, where a member is auto-enrolled, he then has a one month opt-out window. He is entitled to a refund of contributions and is then treated “for all purposes” as if he had never been an active member of the scheme.
Personal pension schemes and wholly DB schemes are not affected. The abolition applies only to members whose qualifying service starts from 1 October 2015, so members who joined before that date may still be offered a short service refund.
This measure will come into force on 1 October 2015.
With so many changes in the pipeline, schemes need to ensure that this one is not overlooked.
The potential requirements for scheme amendments will depend on whether benefits are technically “money purchase” under the legislation and this can be a complex area, so advice should be sought in cases of doubt. The scheme’s preservation provisions will also need to be considered, as in cases where the two-year time limit is “hard wired” into scheme rules, amendment should be made.
Of interest to all DB schemes is the new guidance published on 13 August 2015 by the Pensions Regulator (TPR). TPR has overhauled its guidance on assessing and monitoring the employer covenant, primarily to reflect the replacement of the DB funding code of practice in July 2014.
The guidance is intended to identify good practice for trustees in:
The guidance runs to more than 60 pages but the key points it identifies for trustees to consider are:
The guidance is the first in a series which TPR intends to publish in connection with the new DB funding code and the adoption of an integrated risk management strategy. It highlights the three perspectives from which trustees need to analyse the covenant: the employer’s legal obligation to the scheme; its funding needs and investment risks; and the financial support from the employer or other relevant entities. TPR emphasises that trustees should focus on businesses with a legal obligation to provide scheme support, and also be aware that covenant strength can change rapidly.
The guidance has generally been welcomed and it has been recognised that it puts the employer covenant at the heart of the valuation process and the integrated approach required to DB funding risk management. It should encourage trustees to ensure they have a thorough understanding of their scheme’s covenant before embarking on the valuation process. The guidance stops short of actually requiring schemes to obtain regular external covenant reviews and has been described as “practical and constructive” as it sets out factors which trustees may take into account in concluding that a less detailed or less frequent review may be undertaken.
View the guidance.
Of general interest is the Government’s consultation on a possible imposition of a cap on the exit charges levied on the pension funds of members accessing the new defined contribution flexibilities.
HM Treasury's consultation paper Pension transfers and early exit charges asks for feedback from the pensions industry on potential barriers to people accessing the new pensions freedoms, specifically whether:
The consultation, which will run in parallel to similar exercises being carried out by TPR and the FCA, runs until 21 October 2015. A response is expected in the autumn. HM Treasury has also published an online survey to help capture and understand the experiences so far of people transferring their pension from one scheme to another.
Of potential interest to schemes providing DB benefits is the new guidance published by the restructuring and insolvency team of the Pension Protection Fund (PPF) about pre-packaged administrations (pre-packs).
The guidance sets out the approach adopted by the PPF to pre-packs where the same insolvency practitioner intends to continue as the office holder in the subsequent liquidation or company voluntary arrangement. The PPF's main concern is the risk that a pre-pack is used to offload a company's pension liabilities, particularly in a “phoenix” situation where the new company is controlled by, or has strong links to, the owners or management of the old company that built up the liabilities.
The PPF will examine the extent to which a company's unsecured creditors (particularly the pension scheme trustees) have been consulted before a pre-pack is undertaken. If there has been no consultation, or any concerns have not been taken into account and remain unaddressed, the PPF may seek to appoint an alternative insolvency practitioner.
In recent years, concerns have arisen about the use of pre-packs where a company is put into administration and its business or assets (or both) are sold immediately under an arrangement which was agreed before the administrator was appointed. A key issue for unsecured creditors, such as pension scheme trustees, is that they are often unaware a pre-pack is planned until it has been triggered and therefore have little opportunity to protect their interests. If a company sponsors a defined benefit pension scheme which is in deficit, the trustees as unsecured creditors are likely to be concerned about the scheme's financial position following the pre-pack.
The new guidance is a toughening of the PPF's stance on pre-packs. While the PPF's restructuring and insolvency team acknowledges that self-regulation, which was adopted as a result of a Government review in 2014, may improve matters, there is clear scepticism that those recommendations will make much difference in practice.
View the guidance.
Of interest to all very large multi-employer pension schemes (master trusts) are the amending regulations which ease the current rules relating to who may act as scheme auditor.
The amendment to the Registered Pension Schemes (Audited Accounts) (Specified Persons) Regulations 2005 introduces an easement for trust-based multi-employer schemes with 500 or more participating employers. A person will be allowed to act as scheme auditor for such a scheme even if he is otherwise prohibited from acting as statutory auditor of the scheme's participating employer under section 1214 of the Companies Act 2006 (which stipulates an independence requirement for a statutory auditor).
This amendment responds to concerns that it was difficult for master trusts to find someone to act as a statutory auditor who met the independence requirement. Corresponding changes were made to the Occupational Pension Schemes (Scheme Administration) Regulations 1996 last year for the same reason.
The regulations are subject to Parliament's negative resolution procedure and are due to come into force on 1 September 2015, but they will have retrospective effect from 6 April 2015.
Of interest to all DB schemes with guaranteed minimum pension (GMP) benefits is the recent ruling of the Pensions Ombudsman (PO) that the trustees are entitled to defer taking any action to equalise GMPs until required to do so by the Government.
The PO dismissed a complaint by a member of the scheme who argued among other things that the trustees had not equalised GMPs.
The complainant left service aged 62 in 2010 and asked for details of his deferred pension on leaving service and on reaching normal retirement age (NRA). The scheme had amended its accrual rate and equalised NRA at 65 for men and women in January 2003, while retaining an underpin for service before that date. When the actuary was replaced, the new actuary advised the complainant that the figure for his pension at NRA should have been adjusted to allow for a separate Barber underpin. The complainant was dissatisfied with the calculation method used by the actuary and argued it did not properly reflect the main 2003 underpin incorporated into the scheme rules or the statutory requirements regarding equal treatment between the sexes. He maintained the scheme trustees had a duty to equalise GMPs between men and women.
The PO rejected the complaint. He determined that it was not his role to decide which of the actuary's calculation methods was preferable. Both actuaries were members of their professional body and therefore bound by its standards. Two actuaries could “quite properly hold different professional opinions about a particular matter”. The current actuary was fully entitled to use her preferred method to calculate the complainant's deferred pension at NRA, which she considered properly took account of both underpins and which she had certified as reasonable. While the GMP calculation distinguished between the sexes (because of the differing GMP pensionable ages applying to men and women), the trustees were entitled to defer taking action to equalise GMPs until the Government required them to do so.
In Barber v Guardian Royal Exchange in 1990, the European Court of Justice (ECJ) held that it was unlawful to discriminate between men and women, for example in providing pension benefits on retirement at different ages. The effect of the Barber judgment was later limited in Coloroll so that the requirement to equalise benefits applied only in relation to pensionable service after 17 May 1990.
The Coloroll decision also clarified that trustees could amend a pension scheme's rules in order to equalise benefits between men and women, by levelling benefits up or down, so long as the sexes were treated equally. The period between 17 May 1990 and the date on which the rules were amended to achieve equality is commonly known as the “Barber window”.
Since Barber there has been no agreement as to whether the case requires GMPs to be equalised along with members' main scheme benefits. The issue was considered by the PO in the Williamson (H00177) determination, with the PO ruling that schemes were under a duty to equalise GMPs. However, that determination was subsequently overturned on appeal to the High Court in Marsh Mercer Pension Scheme v The Pensions Ombudsman  on the basis that the PO did not have jurisdiction.
In January 2010, it was announced that the Government intended to bring forward legislation expressly requiring schemes to equalise GMPs. The DWP consulted on draft secondary legislation in 2012, along with guidance on a possible equalisation method. However, these proposals were heavily criticised and have not yet been finalised. It appears the DWP may issue further information later in 2015.
The issue of whether occupational DB schemes are required to equalise GMPs between the sexes and if so, how they are to make those calculations, has led to uncertainty since the Barber decision.
While some are of the view that the legal duty is clear and schemes should have taken the necessary steps irrespective of any guidance issued by the DWP, others have said that there is no such obligation and schemes should not equalise until required to do so by UK legislation.
Whichever side of the argument is correct, this decision from the PO will offer some comfort to those arguing that there is no current effective requirement to equalise.
In what is thought to be the first appeal to be heard on the adequacy of a contingent asset in the form of a parental company guarantee, the PPF Ombudsman has upheld the PPF’s refusal to recognise a type-A contingent asset.
The PPF Ombudsman rejected a referral by the trustees of the Land Rover Pension Scheme following the PPF's refusal to recognise the relevant parent company guarantee as a levy-reducing measure for the 2013/14 levy year.
The PPF decided the guarantee did not meet the requirements in rule G2.3 of the 2013/14 levy determination relating to guarantor strength. Broadly, rules G2.3(1) and (2) provided that the PPF could accept a guarantee as a contingent asset if it was satisfied the guarantee reduced the risk of compensation being payable from the PPF in the event of employer insolvency and that the resulting reduction in the scheme's levy was reasonably consistent with the level of reduction in risk. The PPF's concern was that the guarantor's net asset value related predominantly to its investment in the employer and if the employer became insolvent, the guarantor was unlikely to have sufficient non-employer-related assets to meet its obligations under the guarantee. In the absence of the guarantee, the scheme's risk-based levy was assessed at approximately £2.4 million.
The initial decision was upheld on both review and reconsideration. The PPF's reconsideration committee said that although the trustees had provided evidence about the guarantor's financial position, it was unclear which assets would be available on the employer's insolvency.
On appeal, the Ombudsman upheld the PPF's decision to reject the guarantee. He noted that he had no power to “go behind” the levy determination, and found that at all stages the PPF gave full reasons for its decision, which were not beyond the bounds of reasonableness. The key question for the PPF in applying the test under relevant rules was whether it could accept the trustees' certification that they had no reason to believe the guarantor could not meet its full commitment under the guarantee. While the trustees had sought to explain how assets would be realised by the employer in the event of its insolvency, the PPF was correct to recognise that the extent of recovery by the scheme was not evidence of the guarantor's ability to meet its obligations.
View the Determination.
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
On February 18, 2020, the Financial Reporting Council (FRC) published guidance for companies on the disclosure of risks and other reporting consequences arising from the emergence and spread of the coronavirus.